Pakistan seeks bailout amid crisis as currency hits all-time low
The removal of the unofficial price cap in Pakistan saw its currency's largest single-day decline as it plummeted 9.61% to Rs. 255.43 against the US dollar on Thursday. The unofficial regulation of the exchange rate was lifted as the country is seeking a crucial bailout from the International Monetary Fund (IMF) pending since November amid demands for economic reforms and fiscal consolidation.
Why does this story matter?
- Crisis-stricken countries seeking aid from the IMF are reportedly facing pressure to relax their economies and let market forces determine exchange rates.
- The low forex reserve has triggered food inflation in the country amid a severe cash crunch.
- Pakistan secured a $6 billion bailout from the IMF in 2019. However, the recent installment of $1.1 billion has been stalled since November.
Largest single-day decline since 1999
The Pakistani rupee plunged Rs. 24.54 on Thursday, which is the largest decline since the new exchange rate system was introduced in 1999. Experts hold the delay in the revival of the IMF's bailout talks mainly responsible for the drop in the Pakistani rupee's value. An IMF team will soon visit Pakistan to discuss the stalled ninth review of the current funding program.
Pakistan's stock exchange shows positive signs
Earlier this week, Pakistan's central bank raised interest rates to a 24-year high to battle abrupt price rises. Videos emerging on social media show citizens fighting among themselves for food and chasing food trucks. However, despite the tanking Pakistani rupee, the country's stock market showed positive signs as the benchmark index KSE-100 registered a growth of 2.4%, the most in over five months.
Foreign exchange reserves depleted, currency being exchanged in black market
Financial experts said the Pakistani rupee is expected to weaken further and touch Rs. 260 against the US Dollar by June end. JS Global Capital research head Amreen Soorani said Pakistan's dollar reserves are facing pressure and there hasn't been any fresh influx providing a significant increase to the reserves. Currency is being exchanged on the black market at 10% over the prescribed rates.
Flood pushed Pakistan's economy to the edge
Dealing with a severe flood, Pakistan was prompted to backtrack on several promises made in the deal with the IMF. Following this, the Washington-based lender withheld the next round of funding. It has asked Pakistan to increase energy rates, impose more taxes, and not artificially control the exchange rates. Pakistan's foreign reserves currently have less than three weeks' worth of import cover.
Amid economic crisis, Pakistan's major cities faced power breakdown
Three weeks after Pakistani officials ordered all markets, restaurants, and malls to close early in an emergency energy conservation strategy, major cities like Karachi and Lahore faced power blackouts owing to grid failure on Monday. As per reports, Pakistan has enough power-producing capacity to fulfill demand but lacks the resources to run its oil-and-gas-fired facilities.